As I see it, there are four factors at play in our industry today:
� Severe demand reduction across the globe, as demand for everything from coated metallic parts for windows to tractors to appliances slows;
� Stalled conversions from industrial coatings conversions to powder; even though powder coatings are more sustainable in many applications, end use customers and coatings providers have not yet found the incentive to make the change;
� Lack of material innovation that would drive deeper adoption of powder-based coating systems. In part, this is due to the industry's inability to reach out to branded OEM's across the globe and best understand their brand needs, then convert that knowledge into material developments; and lastly,
� An absence of enough meaningful collaboration with the equipment providers and pre-treatment providers to better deliver improvements in cost-per-coated part,as well as enhanced product consistency.
Before addressing each of these forces, let me review powder coatings' place in the broader coatings world. We are a part of the $75�85 billion global market for formulated coatings, of which industrial applied coatings represents $30-35 billion in sales. Powder is one class of industrial coatings, representing $5-6 billion of sales, or slightly under seven percent of all coatings consumed. Up until this decade, powder coatings recorded growth rates in excess of ten percent per year, with healthy returns on capital. The growth came as OEM's converted their surface treatments to powder applications for improved economics, durability and improved environmental factors. While this growth has substantially slowed in the past few years, powder coatings is still recognized as the fastest-growing coatings class.
The challenge (and opportunity) for the powder coatings industry, is to restart the conversion engine, using new material advances to both restore healthy returns on capital and growth.
Most recent earnings reports in our sector have noted that poor results, in part reflect dramatically down demand for steel, aluminum and other metal substrates as the building and construction market worldwide has slowed. Nearly all industrial coatings firms reported terrible performance for the fourth quarter of 2008, and the primary OEMs-from General Motors and Toyota to John Deere-are all retrenching.
The combination of low industry demand and the large number of small, medium and global powder providers bodes an unhealthy near-term future. Excess capacity is chasing orders. Return on capital for many firms is likely to further worsen in 2008. Some of our customers and competitors may not survive this downturn, as capital allocated to underperforming return sectors becomes scarcer. Powder manufacturers simply do not have the capacity to extend working capital in a period of tight liquidity. In addition, the migration of parts manufacturers to low-cost countries for economic advantage appears to have slowed significantly. It's increasingly clear that the capacity increases made earlier are now perhaps misaligned with future local demand.
Given the weak profitability of powder, there is little financial incentive for multi-system coatings providers to favor a switch to powder versus an existing coatings class. Within the universe of the $5-6 billion powder industry, the majority of providers are broad-based industrial coatings firms. They have powder lines, but this is not their sole purpose. Adoption rates are low in Japan, but much higher in Italy. Why? Adoption rates are highest where OEMs played the leading role in demanding a different form of coatings performance that nurtured the growth of powder. Lastly, powder remains a leading choice in a market where capital costs are rising for coatings lines, but powder coatings technology has lost its compelling argument for converting markets.
While color matching is an enjoyable art, developing good chemistry and designing new materials is tough science. In today's environment, few companies have the financial resources to justify new material development. That said, even those that do have not had much success in the last decade. Achieving success here requires a deep working relationship between brand owners and technology providers. The powder coatings industry needs to better understand the brand needs of OEMs. That is, how they want to position a car, an appliance, a farm tractor or an aluminum window profile, and so on. To do this, powder providers need to reach out to leading edge OEMs and start a dialogue about how the metal part plays a role in their brand, and then working in partnership with them to design the surface treatment that fulfills that objective. Brand owners need technology to differentiate their products. As an industry we need to dedicate re�sources to have that dialogue and translate the need into selling a value added powder.
To be a technology provider, one needs to invest in R&D, and to have a proven capability for delivering solutions. Future material solutions need to expand the performance range of the powder, be a more sustainable material, and/or provide system savings to the OEM or coater. It need not always be a lower powder price! In the absence of our industry investing in powder development, we are destined to remain the poor cousin of coatings.
Collaborate to succeed
If past economic cycles taught us anything, it is that companies that can think in the shoes of their customers and offer solutions always get stronger. To achieve this perspective in powder, we need to improve the working relationship with the equipment providers and pre-treatment suppliers, as the customer is always interested in the cost, quality and performance of their coated part. Collaborating to optimize OEM brand needs, or the coater's line and efficiency will lead to enhanced profitability and growth. Furthermore, material innovation cannot be done in a vacuum; it must encompass the pre-treatment and equipment being used.
Responding to the challenges
Like all others in this industry, Rohm and Haas is feeling the effects of weaker demand, and we will continue to streamline our manufacturing and cost structure in order to be more in line with expected future demand.We monitor our return on capital performance closely and have a number of capital plans (Capex and Working Capital) to lower intensity as we work our way through this reduced demand environment. Yet, we are still actively targeting growth in new applications and markets to make up for a weaker core demand. Profitable Share Gain has been a key selling strategy for the last one to two years. We have also increased our go direct market strategy (France in '08, U.S. in '09).
Where we find conversions are stalled (in Japan, and in the U.S. for aluminum profiles) we are actively engaged and working to shift business to powder. This is an ongoing commitment and our motivation for powder is not slowed by an alternative coatings choice. We are also more active now in markets in Russia and India where capital coatings line decisions are made to ensure we capture a share of these opportunities.
Our biggest opportunity in the near term is with the introduction of new materials. Rohm and Haas Company is a polymer design company, and we believe we are uniquely qualified to leverage this expertise with our powder formulating skills to offer innovative new materials. As a technology provider, we will marry this effort with brand owner relationships to ensure we deliver needed material innovation. During 2009 we will launch materials with improved corrosion resistance for the building and consumer markets, materials requiring less pre-treatment, im�proved filiform resistant materials for the wheels market, new clears for the hardware markets, as well as materials with added functionality in the electronic housing space.
On the collaboration front, we have reinvigorated our efforts with some key partners to accelerate the adoption of solutions for the brand owners. Pre-treatment and equipment is an equal partner with materials in the pursuit of innovation for our customers. Increasingly we see this collaboration as also having positive sustainability benefits for our customers.
Rohm and Haas has actively invested in its powder business, especially in R&D, over the last few years, and believes this is the only way to reshape the direction of the powder industry for long term conversions and expanded profitability. We are very encouraged about the future possibilities and role of innovation as a continued driver of industry growth and profitability.